State Paid Barnes & Thornburg $9.6 Million For Losing Case Against IBM

The state's lawsuit seeking hundreds of millions in damages against IBM for the failed welfare privatization implementation was a dubious lawsuit from day one. It was no secret that the Daniels administration had conspired with the law firm of Barnes & Thornburg , which represented ACS, to concoct a plan to privatize the state's welfare services and steer the bulk of that work to the law firm's client. It began with making sure that Daniels appointed a former ACS executive, Mitch Roob, to run the agency. Roob and another former executive of ACS, former Indianapolis Mayor Steve Goldsmith, immediately began pushing a model based on a privatization model being implemented by ACS in the state of Texas, one that would ultimately be chosen by the agency Roob ran. That model was known as "remote eligibility," one under which remote call centers would process all claims for welfare benefits over the Internet or over the phone rather than the traditional model of having case workers in county offices who met with those applying for benefits face-to-face. Word spread quickly among potential bidders that the bidding process was rigged in favor of the coalition of companies responding to the public bid, which was led by IBM but included ACS as the major subcontractor participant. In the end, all competitors dropped out of the bidding process, leaving the IBM-led coalition as the sole bidder for a more than $1 billion, 10-year contract, the largest in the state's history. The state inked a contract with the IBM-led team despite the fact that the model upon which it was based in Texas had been halted by that state's governor because problems with implementation were "so severe."

As Judge Dreyer's opinion denying all claims the state made against IBM found, the bulk of the services provided under the privatization contract were being performed by ACS, which was the source of most of the complaints against the system when its first rollout began. Instead of working with its prime contractor to work through the problems, ACS's lobbyist at Barnes & Thornburg, Joe Loftus, began meeting secretly with high levels of the Daniels administration behind IBM's back to undermine its control of the contract, including Gov. Mitch Daniels. Judge Dreyer noted one e-mail exchange that Loftus had with Roob where he complained that IBM "just didn't get it" in reference to frequent lectures he received from them reminding him that IBM was the lead contractor and the principal point of contract for all communications under the conract. Even ACS officials who testified at the trial conceded that Loftus' communications behind IBM's back constituted a breach of their contract, and the state was breaching its contract with IBM by engaging in the direct communications with ACS. These communications created "distrust" among the contract partners according to Judge Dreyer's opinion. "Certainly the State showed that IBM did not perform well in some respects, especially when trying to get subcontractor ACS Human Services ("ACS") to answer phones notwithstanding evidence of ACS lobbying against IBM in violation of its own subcontract." But Dreyer found plenty of evidence offered during the long trial where the state and IBM traded claims against one another where the state had given favorable reviews of IBM's work. One scoring of the company's performance prepared by FSSA's Zach Main gave the company 9 out of a possible 10 points. What the evidence showed was that IBM was being scapegoated as public pressure mounted to drop the privatization move, particularly from state lawmakers.

The state had the option of terminating its contract with IBM for convenience, but it chose instead to terminate the contract for cause and put ACS in charge of a new hybrid approach to delivering services, and to file a lawsuit against IBM seeking more than $150 million in damages, and IBM, in turn, filed a countersuit against the company seeking more than $100 million in damages. What stunned legal observers was a decision by Gov. Mitch Daniels personally to hire the law firm of Barnes & Thornburg to represent the state's interests over the objections of Attorney General Greg Zoeller given that it had been knee deep in representing ACS from day one. The engagement agreement entered into with the law firm contained pages of disclosures concerning the law firm's potential conflicts. Some legal observers questioned whether the conflicts of interest raised in the engagement letter were even waivable under the rules of professional conduct. A key deputy chief of staff in the governor's office, Betsy Burdick, worked with her brother at the law firm, Brian Burdick, to ink the deal. Although Burdick signed the agreement, he's a bond lawyer and not a litigator or an expert in contract law. According to the Star's Mary Beth Schneider, the state has paid the law firm a staggering $9.6 million to represent the state's interests in the lawsuit. If the Attorney General's office had been allowed to handle the lawsuit, existing state employees would have been utilized at no additional expense to the state. Instead, the very law firm which played an instrumental role in the privatization fiasco was allowed to profiteer from its own handiwork. Judge Dreyer ruled against all of the state's claims against IBM, and he ordered the state to pay IBM more than $52 million. Remarkably, one of the key attorneys handling the lawsuit against IBM for the firm, Peter Rusthoven, had the audacity to accuse Judge Dreyer of writing an opinion that contained "unnecessary political commentary that is neither accurate nor relevant." I think what he meant to say was that he used words that hit too close to home. He said the state will appeal Judge Dreyer's ruling, and the firm will charge the state at least another $250,000 for its services.

For the life of me, I do not understand why a criminal investigation has not been launched by the FBI and the U.S. Attorney's office. This has got to be one of the most corrupt deals in the history of Indiana state government. Hundreds of millions of federal tax dollars were being misspent simply so big campaign contributors of Gov. Mitch Daniels could make a lot of money with no concern at all to the services being provided using those tax dollars. One of the administration's biggest critics in the state legislature is a Republican lawmaker, State Sen. Vaneeta Becker (R-Evansville). “The whole thing could have been avoided if the state from the beginning had just provided new computers and additional training to caseworkers,” she told the Star's Mary Beth Schneider. “A lot of this could have been avoided and a lot of costs.” Gov. Daniels, for his part, was totally unapologetic about the outcome and says he expects the decision will be overturned on appeal. Even if the state loses on appeal, he told Schneider that the more than $52 million the state will be required to pay IBM was irrelevant because they "are so tiny compared to the savings we’re achieving.” The state has spent more than a half billion dollars to date on the privatization effort. What do you expect from a guy who told Congress when he was OMB Director that the Iraq war would only cost taxpayers $50 billion? Oh, and did I mention that Gov. Daniels put a former paid consultant for ACS, Mike Gargano, in charge of FSSA after Roob's successor, Anne Murphy, left the agency after a short stint running the agency? Her sole task was to get rid of IBM after Roob stepped down to become head of the Indiana Economic Development Corporation. Murphy's short tenure simply provided cover for the conspiring parties. When that task was completed, she moved on and Gargano stepped in so ACS and Loftus would have a person under their thumb in charge of the agency.